The franchise lawyers at the Katz Law Group have helped numerous interested franchisees make informed decisions about their future. Here are six common legal and business issues that they think you should keep in mind if you are considering whether to start a franchise.
1. The Franchisor's Reputation
When you open a franchise store, you are the franchisee and the corporation is your franchisor. Some corporations are known to treat their franchisees better than others. Even within a single corporate franchisor, some regions or even individual managers have reputations for being lenient or harsh.
The difference between a good and a bad franchisor can be huge. Profit margins vary tremendously based on your corporate franchisor, and the terms and conditions that franchisors require can be easy to manage or extremely onerous.
Knowing what you are getting into is critical. Your franchisor's reputation towards its franchisees is one of the first things that you need to know.
2. Questionable Financial Data
Before any money is exchanged between the franchisee and franchisor, the corporate franchisor has to provide the Franchise Disclosure Document, or FDD. This is the most important document that interested franchisees will have access to before committing to a long business relationship.
Included in the FDD are lots of important financial data, including:
- Startup fees,
- Estimated initial investment,
- Balance sheets,
- Income statements, and
- Cash flow statements.
These numbers are supposed to give interested franchisees enough information to make an informed decision about their investment in the business. Franchisors, however, frequently exaggerate the positives and downplay the negatives, making your prospects seem rosier than they really are.
3. High Turnover with New Franchisees
Interested franchisees should also pay close attention to how their potential franchisor treats new store owners, rather than settled or established storefronts. In many cases, franchisors give the easy and lucrative opportunities to store owners who have been around for a long time, leaving new players to make the most of what they can out of difficult situations.
In theory, franchisors often use this as a testing ground for seeing whether new franchisees can make it. In reality, though, new store owners frequently find themselves expected to make something out of nothing, where success relies on a stroke of good luck.
If a franchisor has a reputation for high turnover with new franchisees, or there is data to back that up, it may be wiser looking for other franchise opportunities than try to beat the odds.
4. Lack of Experience Among Franchise Operators
The franchise operator is the person who will be managing the storefront. In many cases, the operator is the same person as the franchisee. In others, though, investors partner together to get a franchise location and then hire a franchise operator to handle the daily business in the store they have acquired.
In these cases, it is essential to know whether the franchise operator has experience in the industry and with the particular franchisor corporation. The difference between an experienced operator and an inexperienced one can make or break the investment.
5. The Right to Renew
Interested franchisees tend to be too short sighted when they decide whether to make the plunge. They focus too much on the return that they stand to make on their investment and not enough on the long-term prospects of the franchise relationship.
This becomes a serious problem when the term of the franchise is about to end. At that point, a franchisee's right to renew the relationship will depend on the agreement they made when they first opened the store – sometimes 20 years ago. Franchisors are notorious for imposing steep new demands and obligations to cure problems in order to get the most out of their franchisees who want to keep the relationship going.
6. Encroachment Protections
Interested franchisees should also scour the agreement for their franchisee rights against franchise encroachment. Many franchisors are known to saturate areas with stores to boost their bottom line, even as it undercuts each store's profits.
The Franchise Lawyers at the Katz Law Group Can Help You Perform Your Due Diligence in Massachusetts
All interested franchisees need to perform their due diligence before signing a franchise agreement. The franchise lawyers at the Katz Law Group can help in Massachusetts. Contact them online or call their law office at (508) 480-8202.